Industry 4.0 can be defined as the next phase in the digital transformation of the manufacturing sector, where machines and IT systems, along with other components in the value chain will be connected to create a fully integrated, automated and optimised manufacturing system
The year gone by did not witness any significant surge in global activity. The macro picture is still evolving; industries and governments across the world are carefully calibrating strategies to avoid unpredictable headwinds and seek new growth avenues.
In advanced economies the recovery was modest during the year and largely uneven. The US economy was supported by relatively easy financial conditions with strengthening housing and labour markets. In the Euro area, robust private consumption was propped up by lower oil prices and quantitative easing. On the other hand, the re-balancing of the Chinese economy, low commodity prices and geopolitical tensions in West Asia continued to weigh on growth prospects of emerging market and developing economies.
India remains one of the most attractive economies of the world with a 7.6 percent growth. Amid a challenging global scenario, India remains one of the most attractive economies of the world with a 7.6 percent growth. During the year, the government has been successful on many fronts including sticking to fiscal deficit target and achieving significantly lower current account deficit supported by lower crude oil prices. There are other positives as well. Forex reserves are at an all-time high, investor confidence is robust and the government’s Make in India initiative has been hugely successful in encouraging domestic entrepreneurship and attracting FDI.
The global automotive sector, whose fortunes are closely linked with the performance of the global economy, witnessed mixed fortunes during the year. Passenger vehicles globally grew across most major geographies while, the commercial vehicle sector was particularly weak in the Americas and China while robust volumes were recorded in Europe and India.
The Indian auto industry stood out with all segments barring tractors delivering positive growth volumes. The key drivers for the market included replacement demand, pickup in infrastructure related activities, record low fuel prices, declining interest rates and healthy economic growth.
Our financial performance was again impacted by the volatility in the macro environment. On a standalone basis, our total revenue declined by 5.3 percent, driven by continued weakness in the industrial sector across both, domestic and international markets and unexpected slowdown in the North American Class 8 truck market. Despite top-line challenges, EBITDA margins expanded by 110 bps driven by focus on cost control and supported by benign commodity prices. We continue to strengthen our balance sheet; and we will be a net cash positive company in the next two years. We have focused on creating an efficient cost structure, and will continue to rationalise costs in order to improve competitiveness. We continue to put more thrust on operational efficiency, accelerating new product development and new customer acquisition.
FY 2016 was a challenging year because of headwinds in the form of a global slowdown which impacted three of our key exports verticals; North American Class 8 truck markets, Oil and Gas, Metal and Mining and allied commodity sector. These three verticals will continue to pose a challenge to growth in FY 2017.
We continue to strengthen our balance sheet; and we will be a net cash positive company in the next two years.
The passenger vehicle segment, one of our key focus areas, performed extremely well in FY 2016 and the export revenues from this segment registered a growth of 87 percent. We have also made progress in our aerospace and rail verticals with supply of products for existing contracts as well as winning new contracts.
Over the past few years, the external demand environment has been the biggest impediment to your Company’s growth. Two years of strong growth (FY 2014/FY 2015) was followed by a sluggish demand environment due to volatility in the end-markets. FY 2016 performance was a resultant of the same.
We have started the journey in areas of connected enterprise, big data, mobility, augmented reality (human-machine interface) and additive manufacturing
Following are the key transformation areas of the business over the next few years. The overarching theme is increasing penetration with existing customers and sectors, foraying into new sectors and enhancing product portfolio. All of this will be achieved by leveraging our innovation, metallurgical and technology capabilities to develop products which will address problems faced by our customers related to performance, light weighting or emissions.
We have started journey in areas of connected enterprise, big data, mobility, augmented reality (human- machine interface) and additive manufacturing.
Developing the above new businesses/products does not happen quickly, but your Company has the unique ability to do this on its own. We can develop new products, improve processes and enhance the product portfolio by using our asset light model which will eventually help in improving the return ratios.
We are benefiting from the focus on new technologies and innovation created through in-house R&D. This has resulted in higher productivity, increased cash flows and consequent debt reduction. We are confident that the derisked business model would take the company back on the growth track very soon.
Businesses that can survive the shifting dynamics of global economies and industries will be the ones that can create enduring stakeholder value. Since inception, Bharat Forge has seen and adapted to big change; and will continue to recalibrate strategies and product mix, not just to embrace change, but to lead change. There is a structural shift in the manufacturing space globally driven by focus on emission control, light weighting, asset light model, and so on... We, at Bharat Forge, are aligning our innovation strategy and product mix in accordance with that shift. We are reinventing ourselves as a global engineering company with a deeper presence across varied sectors.
Industry 4.0 can be defined as the next phase in the digital transformation of the manufacturing sector where machines and IT systems along with other components in the value chain will be connected to create a fully integrated, automated and optimised manufacturing system. This will help increase manufacturing productivity, improve efficiency, shift economics and foster industrial growth – ultimately changing the competitive landscape of all the companies.
Industry 4.0 has a strong potential to change the way factories work and it presents tremendous opportunities for innovative manufacturers like us. The Company is preparing to take advantage of this opportunity and trying to create our own ecosystem of a digital organization. We have started this journey in areas of connected enterprise, big data, mobility, augmented reality (human-machine interface) and additive manufacturing. We aim to apply this initiative across the entire value chain and create a cohesive manufacturing ecosystem. We see substantial potential of Industry 4.0 in helping us improve efficiency and increase productivity, thereby reducing costs and increasing our competitiveness.
Industry 4.0 has a strong potential to change the way factories work and it presents tremendous opportunities for innovative manufacturers like us.
The collective capabilities of our people have taken us far; and we will continue to invest in developing our team to sharpen their capabilities and introduce industry-leading practices. We are now encouraging more people from our team to take up fundamental research and get Ph D degrees. Our tie-ups with leading academic institutions such as BITS-Pilani, IIT Mumbai and Warwick University will also continue offering employees an opportunity to enhance their educational achievements, while working.
Industry 4.0 has a strong potential to change the way factories work and it presents tremendous opportunities for innovative manufacturers like us
The essence of Bharat Forge is the unique ability to create value from the intersection of horizontal capabilities with vertical expertise. Our horizontal capabilities comprise size (giving us efficiency of scale) and diversity (which reduces risk in a volatile world); while our vertical expertise includes deep domain knowledge, experience and insight. This uniqueness has brought us to where we are today; and will take us to the next harbour of opportunities. As we expand our presence across sectors, our vision is clear. We are strengthening India’s economic backbone, enhancing national capabilities and ensuring a bigger global imprint–for the country and for ourselves.
Your Company had set certain targets to be achieved by FY 2018 which are on track. However, the global volatility has resulted in the doubling of top-line target to be pushed out from the initial milestone.
I would like to finish off this year’s letter with a famous quote of Zig Ziglar “When obstacles arise, you change your direction to reach your goal. You do not change your decision to get there.” This truly epitomizes the philosophy and culture of your Company.
By Baba N Kalyani
